A number of companies across America, perhaps tens of thousands, will not make it through the COVID-19 pandemic intact. They are both large and small. What they share in common is a drop in access to capital. Retailers and consumer services companies are most at risk, at least for now. A prime example is a crippled and storied retailer J.C. Penney Co. Inc. (NYSE: JCP), which most likely cannot handle a sharp double-digit drop in same-store sales. The federal government might provide it a lifeline if the government rolls out extreme emergency financial measures to support employment. But will it?
J.C. Penney stock has fallen to $0.41 per share and was at one point down almost 40% over the past five days. That means it trades at a level that anticipates an end of solvency. The retailer currently has over 850 stores and employs 95,000 people. The effect of a mass layoff is unthinkable.
Last year, J.C. Penney suffered a 7.1% decline in revenue to $10.7 billion. It posted a net loss of $268 million, compared to a loss of $255 million the year before.
At the end of the period, J.C. Penney had cash and cash equivalents of $386 million. Free cash flow for the year was $145 million. J.C. Penney expects a positive free cash flow this year. However, that is against a drop of 3.5% and 4.5% in same-store sales. That figure could become much worse in a matter of weeks, as people desert malls and other retailers.
The conversation of bailouts is almost always accompanied by the debate about moral hazard. Those who have not guarded against risk in the past should not be bailed out. J.C. Penney does not fall into that category, to the extent that: 1) most of its major mistakes were made years ago by different management, 2) it is part of an industry in which trends have moved almost completely against it. The first issue is more debatable than the second in a conversation about moral hazard.
At the core of a debate about a government bailout of J.C. Penney, at least in the very short term, is 95,000 jobs, and what the loss of those does to the overall national economy. The risk to traditional retail businesses over the next several months is several times that. The effect of a catastrophe against this industry is a large part of what could hammer the national economy.
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